FRANCHISING: The franchise advantage

Shopping centers attract three categories of tenants: national retailers, small independent operators (often referred to as mom-and-pops) and franchises. Each category offers advantages and disadvantages.

Nationally known chains may boast stellar names and attract customers to centers. On the other hand, they may be large enough to dictate leasing terms in conflict with center preferences. In addition, hired managerial staff sometimes fails to feel the pride of ownership necessary when providing customer service equivalent to the brand name.

Independent retailers represent the flip side of the leasing coin. As owners, they work hard to satisfy customers, but they usually don't have the support of a sophisticated business operation or established brand name. Independents lack the clout to negotiate lease terms unfavorable to the center. Then again, their inexperience can delay the leasing process.

Franchises may offer the best of both worlds: nationally known brand names, committed owner-operators, and the support of a sophisticated business organization.

Solid backing

“If you can get a great franchisee, it's like a mom-and-pop running the store, but with the backing of an expert national real estate department, marketing department, and a known brand name,” says Dane Smith, senior vice president of leasing for San Diego-based The Macerich Co. “Moreover, some national retailers have policies about signing leases with certain clauses, whereas a franchisee's only interest lies in deciding whether a store location will make money. Whether the lid in the lease is 7% or 6.5% doesn't make any difference.”

The International Franchise Association (IFA), in Washington, D.C., contends franchise stores make stable tenants, too. IFA research places the failure rate of franchised businesses below 5%, compared to a failure rate of 60% to 90% for new, non-franchised businesses.

Small business start-ups have an even greater failure rate, according to Joseph Field, CEO and chairman of LaMar's Donuts International, a franchising company based in Lincoln, Neb. “Only about 3% of individual business start-ups succeed for three years,” Field says.

Greater confidence

Given the discrepancy between the success of a new franchise store and a new local retailer, CBL & Associates Properties of Chattanooga, Tenn., encourages independent local operators inquiring about store space to look into franchising. “We feel if we do a 10-year lease with a franchise operation, the store will be in business all 10 years,” says Howard Grody, vice president of mall leasing with CBL. “We don't have that level of confidence with a mom-and-pop,” he continues.

As a result, CBL malls display signs for franchisors seeking franchisees. Occasionally, CBL malls organize Franchise Opportunity Nights and invite several franchisors to meet with prospects at a local hotel. “As a mall owner, we also attend these meetings and help facilitate deals,” says Grody.

Although most shopping center leasing people voice an interest in leasing to franchises, they still scrutinize deals with an eye to avoiding problems unique to franchising.

Potential problems

“A center has to protect itself,” says Joseph Tagliola, executive vice president and director of leasing for Los Angeles-based Westfield America. “Cash flows, of course, are extremely important, and there are some problems you have to look out for when dealing with franchises. Suppose a franchisor approaches a mall about opening a store.

The negotiations go well, and you feel you're going down the right path. But three months later, the franchisor hasn't found a franchisee and cancels the deal. The center has had the space off the market for three months. That's a loss of rent and cash flow.”

Franchises don't always deliver on the promise of a dedicated owner working the store, either. Some franchisees grow so large and operate so many stores they pull back from operations and spend more time managing long term returns.

“We feel if we do a 10-year lease with a franchise operation, the store will be in business all 10 years. We don't have that level of confidence with a mom-and-pop.”Howard Grody VP of mall leasing CBL & Associates

“There are two schools of thought about this,” says Tagliola. “First, you might want to deal with a large franchisee with a number of stores. This person will know more than a one-store operator and understand how to run a company in terms of staffing, distribution and business systems.

“The flip side is a company such as Chick-Fil-A,” continues Tagliola. “They have a few company stores, but they prohibit franchisees from owning more than one store, on the philosophy that operators working their own stores will be more productive.”

While such considerations create questions for center executives to ask franchise representatives, they do not dampen interest in franchises. And as time passes, franchise performance may enhance this interest.

IFA does not track specific categories of franchise sales. Still, association research indicates more than half of the 75 franchising industries tracked by IFA sell through stores that might be appropriate for a shopping center. More importantly, franchise performance is improving.

“Sometime this year or next, franchise sales will reach $1 trillion per year,” says Terry Hill, a spokesperson with IFA. “That's almost double the $600 million in franchise sales of five years ago.”

If that's not enough to interest shopping center leasing departments in franchises, John Naisbitt, the best-selling author of “Mega-Trends,” says franchising will become the “primary method of business expansion in the 21st century.”

Michael Fickes is a Baltimore-based writer.

SIDEBAR: Franchisors and centers see eye to eye

LaMar's Donuts International is currently ranked 11th in franchised donut chains. Its franchisees operate 27 stores, with all but two locations in community shopping centers. The company recently embarked on an aggressive growth plan calling for expansion to 1,200 stores by 2011.

Generally, LaMar's has received a warm reception from community center leasing executives, because of the traffic the franchise brings to a center and for its leasing practices. “First, we've done the research,” says Joseph Field, LaMar's CEO and chairman. “We can show our stores will attract 300 to 500 customers a day to locations meeting our demographic criteria.”

LaMar's also provides a full range of leasing support. “We assist franchisees in lease negotiations,” Field says. “This often makes it easier for the lessor. For example, we require a collateral assignment of the lease from the lessor, so if our franchisee fails, we can step into the franchisee's shoes and continue operating the business. This is typical of franchises — they don't want their signs on empty businesses.”

Of course, LaMar's wants deals benefiting its franchisees, too. Like national retail chains, LaMar's also enters lease negotiations with goals such as leasehold improvement allowances and rent factor assessments based on projected performance.